Can complex firms be ethical? An argument for simplification in the financial industry

Regulators have addressed a number of pressing issues over the past few years, including segregating retail deposits from riskier activity, mandating additional accountability by senior management and requiring additional capital. These steps are adequate to place financial firms on sound footing going forward. However, these steps do little to actually change behaviour, or change the underlying issues that caused the financial crisis in the first place. There are two major reasons behind continued instances of misconduct within the financial industry:

Increasing complexity within firms

Failures in establishing ethical expectations

How can addressing complexity improve ethics?

As ‘too big to fail’ turns into ‘too complex to regulate,’ financial firms and regulators alike have found it difficult to prevent misconduct in more opaque areas of the industry. For change to occur within the industry, firms should focus on streamlining complex businesses and processes. Only through a clearer understanding by firms and regulators of what is being done by financial firms can an ethics-centred culture take shape.

How can firms simplify?

Simplification, whether reducing the number of legacy systems present within banks or creating simpler business models, is integral to establishing better business ethics. By reducing complexity, firms can help improve their ethics and mitigate conduct risks by making change:

Industry-led: Firms should define proper governance and oversight, organizing themselves in a way that positions the business so it is easily understood and regulated.

Founded on a commitment to a new culture: Few firms can say they have fully embedded—or even fully defined—needed changes. Firms should take the opportunity of mandatory regulatory changes to embed a new commitment to ethical business and fair treatment of customers.

Based on a responsible retreat from risky markets, products and strategies: Opportunities to expand growth and income should be based on sound, suitable products and strategies, informed by a commitment to fair consumer outcomes.

Firms can improve ethics, and outcomes for their clients, by addressing and reducing their inherent complexity. While this does not mean every complex product or every market needs to be exited, it does mean firms have a duty to make their strategy and product decisions adhere to the expectations of regulators and consumers.